A new concentration risk indicator has been introduced, which primarily covers the existing portfolio of cash as well as consumer and other loans (except housing loans and current account deficits) at the level of each bank. For a bank, the possibility of approving a new loan for a certain number of years will directly depend on the prescribed DTI, as it indicates the upper limit of concentration risk to which a particular bank may be exposed.
The percentage (degree) of credit indebtedness of a certain percent is prescribed, as the excess that plays a role in approving any loan to a natural person after the entry into force of the new provisions obliges the bank to present receivables from that debtor separately. Read on to find out more about debt to income ratio and learn how it’s calculated.
What Is a Debt to Income Ratio Calculator?
Loans and credit cards may start to cause you problems at some point if you do not use them carefully or due to a change in certain circumstances (change in interest rates or change of business). This is especially true for housing loans. A loan indebtedness calculator can help you determine how risky your debt is.
The calculation results are based on assumptions, so it is important that you do not take them for granted. The different circumstances in which you live will cause different answers for each of you.
The purpose of this calculator is to provide you with information that can help you identify your current financial situation. It does not contain any commercial advice. If you find the calculation results worrying, seek help and explanation from a personal banker or financial advisor.
DTI Formula – How to Calculate DTI?
When calculating DTI, you need to use the formula below:
DTI = Recurring Monthly Debt / Gross Monthly Debt
The percentage of the client’s credit indebtedness (DTI ratio) is calculated by comparing the client’s total monthly liabilities with the amount of regular monthly net income. Here’s a simple example of how it’s calculated:
| Recurring Monthly Debt | $1,000 |
| Gross Monthly Debt | $10,000 |
DTI = 1,000 / 10,000DTI = 0.1 (or 10%)
The Process of Taking a Loan from a Bank
The decision to take out a loan should not be made overnight. The very thought of borrowing for the next 20 or 30 years is not pleasant. Did you know that the bank first must determine whether you are creditworthy and decide how much you can borrow? The conditions are not the same for everyone interested and they depend on many factors.
In this text, we will reveal how to calculate your creditworthiness and what you should pay special attention to during this process. When concluding a loan agreement, the bank makes a certain amount of funds available to the borrower. This is the moment when the borrower undertakes to return the agreed amount with the related interest besides paying costs to the bank with the determined payment dynamics.
Since the bank wants to be sure that the borrower will comply with that, the creditworthiness of the client is determined before the loan is approved. DER is an assessment of the probability that the client will settle the assumed obligations within the agreed deadline. By assessing the creditworthiness of a client, banks reduce the risk of bad placements and thus ensure a quality portfolio.
How Does the Bank Assess Whether You Are Creditworthy?
To assess the creditworthiness of the client (debtor, joint and several debtors, or guarantors), the bank uses information on:
- Regular income
- Employment status of the employer with whom the borrower is currently employed;
- Obligations that the borrower has in all financial institutions (such as banks, leasing companies, etc.); and
- Tidiness in the execution of its financial obligations (credit history of the client).
The potential debtor must meet the bank’s criterion on the regularity of repayment of its existing liabilities by reviewing the report of the credit bureau as well as the unencumbered part of the regular monthly income determined by mathematical calculation of creditworthiness.
It is important to know that the basis for calculating creditworthiness is regular monthly income. This is a six-month or quarterly average income determined by payrolls and receipts. It can also be pension checks when it comes to pension beneficiaries.
The bank is obliged to calculate the amount that can be considered a monthly obligation of the debtor in accordance with its internal acts. It depends largely on the current account deficit and is determined based on all data on the loan at its disposal, including the amount of overdraft, amount of overdraft usage, interest for the use of the allowed deficit on the current account, the period for which the agreement on allowed overdraft was concluded, etc.
Also, information on approved overdrafts from the report of the Credit Bureau can help estimate the monthly obligation of the debtor. Therefore, when determining the ratio of debt to income, the monthly amount of liabilities that depends on the approved minus should be increased by the monthly amount of liabilities under the newly approved loan and net income.
How Is Creditworthiness Calculated?
Creditworthiness is the basis of any credit cooperation with the bank when the client submits a request for housing, car loan, allowed overdrafts on the card, or cash loan. The regulations aim to help prevent the emergence of problem loans in the banking sector.
It’s also intended to prevent possible consequences in the event of the uncontrolled granting of non-performing loans regarding households for terms that are not in line with the risk of this product and the creditworthiness of each individual debtor.
The creditworthiness calculation methodology is a set of rules and policies whereby the bank defines the criteria and manner of approving credit arrangements. The basic criterion that a natural person must meet is the adequacy of the ratio, which represents the ratio of credit obligations to monthly income. Keep in mind that when determining the ratio of debt to income, your total liabilities (and regular net income) should be taken into account.